With oral argument looming in a case challenging the constitutionality of the PCAOB, the Center for Audit Quality has strongly defended the Board’s achievements in accomplishing the goals of the Sarbanes-Oxley Act. In an amicus brief filed with the Supreme Court, CAQ said that the Board has improved audit quality and enhanced investor protection by conducting thorough inspections, focusing on remediation, and helping to improve the function of audit committees, backed up by the ability to impose meaningful sanctions. Oral argument in the case is set for December 7, 2009. CAQ is affiliated with the AICPA and counts as members over 700 audit firms.
The case, brought by an audit firm, is before the Supreme Court on a grant of certiorari of a split panel ruling of the DC Circuit Court of Appeals that the PCAOB’s creation was constitutional. The main argument is that, under the Appointments Clause, Board Members are Officers of the Unites States subject to appointment by the President and not by the SEC, as is currently required by Sarbanes-Oxley. The Center decided to focus its amicus brief on the need to leave the Board intact so it can continue the work of enhancing audit quality as Congress envisioned. (Free Enterprise Fund and Beckstead & Watts v. PCAOB, Dkt. No. 08-861).
The brief urged the Court to maintain the PCAOB’s oversight of auditors of company financial statements and refrain from dramatically changing the regulatory structure for the second time in less than a decade. In asking the Court to leave undisturbed the PCAOB oversight regime, CAQ emphasized that Congress structured the PCAOB to ensure that the regulation of audit firms is undertaken on an informed basis, but is not subject solely to the viewpoint of the audit profession. This structure enables the Board to reflect auditor best practices and serve the interests of the public. In addition, it is important to provide consistent and predictable regulation that can be relied upon by both auditors and investors.
Were the Court to find the PCAOB to constitutionally created, warned CAQ, the uncertainty surrounding the effect of past regulations, and the question of what form future regulation would take, would have negative consequences for investors, auditors, and the markets. At a time of financial upheaval, continued CAQ, overturning the established system of auditor regulation would exacerbate investors’ fears about the integrity of the markets and interfere with the ongoing work of regulation.
More specifically, CAQ noted that PCAOB inspections have improved audit quality by providing an independent review focused on remediating audit issues identified during the inspections, and by enhancing transparency to both audit committees and investors. Congress decided in the Sarbanes-Oxley Act that quality control criticisms identified during an inspection must remain non-public for a year after they are identified. If those criticisms are not addressed to the PCAOB’s satisfaction within the year period, they are then publicly reported. This provides registered firms additional incentive to correct problems.
The publication of inspection reports also increases transparency of the audit process to audit committees and investors by providing insight into areas where the PCAOB identified weaknesses or deficiencies through inspection. In turn, this additional information assists audit committees in their oversight of the registered firms.
Moreover, the Sarbanes-Oxley Act gave audit committees an important role in reviewing the quality of audits of financial statements. Thus, it is significant that a CAQ survey found that audit committees overwhelming believe that the quality of audits has improved under the PCAOB.
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